On January 27, 2025, a growing player in the hygiene products sector, Lushush Smart Ltd. (referred to as "Lushush"), officially submitted its listing application to the Hong Kong Stock ExchangeCoordinating the initial public offering (IPO) are leading financial institutions including China International Capital Corporation, CITIC Securities, and GF Securities (Hong Kong) serving as joint sponsors.
In recent years, Lushush has made significant strides in emerging market sanitary goodsAccording to a report by Frost & Sullivan, in the year 2023, Lushush ranked first in market share for both baby diapers and sanitary napkins in Africa, holding 20% and 14% respectivelyIf evaluated on sales revenue, the company secures a commendable second position in both categoriesWith over 15 years of international experience, Lushush has established itself as a leader in Africa's hygiene products market.
As part of its strategic expansion plan, Lushush is now looking toward Latin America and Central AsiaThe funds raised from the IPO are earmarked for various initiatives, including enhancing overall production capacity, upgrading production lines, conducting marketing and promotional activities in Africa and beyond, strategic acquisitions within the hygiene sector, upgrading customer relationship management (CRM) systems, hiring management consultancy services for market and product analysis, as well as general operational funds.
A Slowdown in Growth
Founded in 2004 by the entrepreneurial couple Shen Yanchang and Yang Yanjuan, Lushush's journey began under the umbrella of the Guangzhou Senda Group where it started operations as a business divisionThe group evolved from a mere sales entity into an integrated company capable of both manufacturing and sales by 2009. In 2018, as the restructuring was finalized and Lushush rebranded itself, the company established its headquarters in Dubai's airport free trade zone, marking a significant transition.
According to the prospectus, Lushush positions itself as a brand focused on quickly developing emerging markets including Africa, Latin America, and Central Asia
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The company's primary business lines encompass the development, manufacturing, and sales of baby diapers, training pants, sanitary napkins, and wet wipes.
Analyzing the revenue data illustrates that Lushush continues to maintain impressive growth as a leader in African hygiene productsFor the reporting period from 2022 to September 2024, Lushush generated revenues of $320 million, $411 million, and $334 million respectively, with profits reflecting $18.39 million, $64.68 million, and $72.28 million at respective intervals.
Despite this growth, the company's revenue growth appears to be losing momentumThe first three quarters of 2024 showcased a modest year-on-year revenue increase of only 2.4%, contrasted against a much healthier 29.2% growth rate achieved in 2023. Similarly, net profit growth during the same timeframe dropped to 54.1%, significantly lower than the staggering 251.7% witnessed the previous year.
Significantly, the prospectus reveals crucial insights into Lushush's performance metricsWhile it holds the top position in the African baby diaper market with an impressive sales volume of approximately 3.686 billion units and a market share of 20% in 2023, the revenue earned positions them second, accounting for $320 million and a mere 17.2% of market share.
The questions arise: What factors are contributing to the slowdown in growth? Why is it possible for Lushush to lead in sales while trailing in revenue? The answer may be tied to their aggressive low-price strategy.
Decline in Average Prices
Utilizing a low-price strategy has been key to Lushush's market penetration for yearsAs product sales have surged, average prices for their offerings generally trend downwardBy the end of 2023, the average selling price for their core product, baby diapers, was merely 8.72 cents per piece, dropping to 8.30 cents by September 30, 2024, reflecting a 4.82% decline in that periodFurthermore, their flagship brand, Softcare, similarly saw a price drop from 9.27 cents to 8.80 cents, showing a reduction of 5.07%.
Other product lines, including training pants and wet wipes, have also experienced price reductions
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Training pants saw a price reduction from 10.32 cents at the end of 2022 to 8.66 cents during the first three quarters of 2024, while the price of wet wipes decreased from 1.04 cents to 0.96 cents during the same period.
When comparing Lushush with established domestic brands like Hengan International, there glaringly major differences in profitabilityHengan's gross margins during the years 2022 to 2023 and into the first half of 2024 hovered around 66.8%, 63.8%, and 62.7% respectivelyIn contrast, Lushush's gross margins were reported at 23%, 34.9%, and 35.4%, which is only about half of Hengan's margins.
Although their low price strategy has garnered Lushush leading market shares in African baby diaper and sanitary napkin sectors, increased competition is revealing the limitations of such an approachWith continually dropping average prices, profit margins consequently are being squeezed tighter.
Reliance on Intermediaries
Alongside its low-price approach, Lushush has adopted a localization strategyIn 2018, Lushush initiated localized production facilities in Ghana for baby diapers, training pants, and sanitary napkinsReports from Frost & Sullivan highlight that Lushush currently possesses the highest number of local factories across Africa, with eight production plants and 44 production lines operational as of September 30, 2024.
Conversely, Lushush's expansion into markets beyond Africa has been lacklusterAccording to the prospectus data for the reporting period, the Latin American revenue contributions were recorded at $36,300, $516,800, and $593,100, which represents a mere 0.1%, 1.3%, and 1.8% of the total revenue respectively; the Kazakhstani market even accounted for less than 0.1% of total contributions.
Over 98% of Lushush's revenue originates from the African market, which ushers in excessive dependency on this regionHowever, geopolitical instability across Africa—including conflicts in Western Sahara and the Congo—presents palpable risks to business stability.
Moreover, the unique characteristics of both the overseas and African markets mean Lushush’s connection to its customer base is heavily dependent on intermediaries
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